Bankers fear sharp increase in bad loans

PUBLISHED : Friday, 15 October, 2010, 12:00am
UPDATED : Friday, 15 October, 2010, 12:00am

More than seven out of 10 bankers polled in a semi-governmental survey expect China to face a sharp rise in non-performing loans when problematic lending to local governments and the property sector turns sour.

Around 71 per cent of the bankers believed a looming bad-loan problem was likely to explode as early as in three years, while the remaining 29 per cent said it would not take place, according to a report released yesterday by the China Banking Association and PricewaterhouseCoopers (PwC).

The survey was conducted in the second quarter of the year through electronic questionnaires, with 752 valid responses received from 44 mainland banks. The project team also conducted face-to-face interviews with 70 senior banking executives, according to the authors.

Banks extended a record 9.6 trillion yuan (HK$11.16 trillion) in new loans last year to help finance a stimulus programme aimed at boosting the economy, with a large portion going to the property sector.

Local governments, which are not allowed to issue debt or secure bank loans, set up financial vehicles to secure funds for their infrastructure projects. Of the 7.66 trillion yuan of outstanding loans to these financing vehicles at the end of June, about 2 trillion yuan, or 26 per cent, are at serious risk of default, according to an unidentified source cited by the official China Securities Journal yesterday.

The 'projects or fiscal guarantees did not conform to regulations' and 'there will be serious risks in paying them back. For example, the loans have been embezzled or used as investment capital', the paper said.

Another 50 per cent will not be recoverable from the projects that they have funded but could be covered by secondary sources, such as through government revenues. The remainder of the loans would be repaid, according to the paper.

Nearly half of the bankers polled believed that local government-backed debt carried 'relatively high' loan risk and were unconvinced by the commercial profitability of the projects.

Jimmy Leung, a consultant at PwC, said: 'The time span for local governmental financing is usually pretty long, and bad loans won't break out at once. Chinese banks have got a lot of experience in this aspect and I believe the risk is within their control.'

When asked 'what business factors give you the biggest headaches', 75 per cent of the bankers picked 'the relatively high degree of uncertainty in the direction of the real estate market'. They said short-term risks were building, with property development loans needing particular attention.

Developer loans, mortgage loans and other lending secured by real estate accounted for nearly half of the total outstanding loans of mainland banks at the end of March.

In a bid to clamp down on speculation, Beijing has raised the down payment requirement for home purchases, increased mortgage rates, restricted people in some cities to buying only one apartment and will likely introduce a property tax on a trial basis to further curb speculation in the sector.

Charles Chow, a partner of PwC, said: 'Banks have sensed the risk and have done their part of the job to prevent the risks.'

Ticking away

Local governments and the property sector hold most of the risky loans

Percentage of the 7.66 trillion yuan loans to local governments that are considered at serious risk of default: 26%